CBOE and CME battle for bitcoin futures bragging rights
Venues offer competing contracts as they seek to exploit rising Wall Street interest
Chicago’s two largest derivatives exchanges are going head to head in coming weeks to become the US market of choice for bitcoin futures trading.
Cboe Global Markets said on Monday it would begin trading its bitcoin futures contracts, known as XBT futures, next week, on December 11, offering free trading for the rest of the month to help spur transactions.
That will steal a march on its rival, CME Group, the world’s largest futures exchange, which will launch its futures contracts the following Monday.
Both exchanges are seeking to exploit rising interest from Wall Street in the controversial cryptocurrency, whose value has mushroomed this year. Earlier on Monday it hit a record $11,800, having been less than $2,000 only in April.
Institutional investors have been keen to trade the asset in a more recognised, regulated market. Shares in both CME and Cboe have risen nine per cent since the end of October as they firmed up their plans.
Ed Tilly, chief executive of Cboe, said there was “unprecedented” interest in bitcoin. “We are committed to encouraging fairness and liquidity in the bitcoin market.”
In a rare head-to-head race to dominate a new market, the exchanges are offering traders competing types of contract.
CME’s prices are a composite derived from four bitcoin exchanges. It is also planning to limit the amount of contracts investors can hold to 1,000. That would be equivalent to less than 1 per cent of the market available to trade, the CME estimates.
Cboe’s contracts are based on a daily auction price from Gemini, the virtual currency exchange run by twins Cameron and Tyler Winklevoss. Investors may not own or control more than a net 5,000 contracts, long or short combined, and the market will only be open for just under six hours.
Both exchanges are insisting that deals will be settled in cash the day after contracts expire. Some investors, such as electronic market makers, have expressed an interest but also made public their reservations.
DRW of Chicago, one of the world’s largest proprietary trading companies, has a subsidiary named Cumberland for buying and selling bitcoin.
“Although DRW and Cumberland haven’t been directly involved in the design of these contracts, our recommendation to any exchange that has asked is to list a physically-delivered bitcoin futures contract,” a spokesperson for DRW and Cumberland said.
“Products indexed to a spot exchange or related auction will be inherently flawed due to the constraints that currently exist on these spot exchanges.”
The market’s main regulator, the Commodity Futures Trading Commission, has had concerns that futures correlated to the highly volatile bitcoin price could create instability in clearing houses, the market buffers that act as counterparties to a trade and prevent any defaults from infecting the rest of the market.
To counter this, traders will also have to pay higher-than-normal amounts to both backstop their bitcoin trades and provide continuous funds for their positions.
CME will demand from investors an initial margin of 35 per cent to back the trades in its clearing house, while traders using Cboe will need to pay 33 per cent of the trade price upfront.
In a speech in London last week Brian Quintenz, the CFTC Commissioner, said the agency had the powers to raise the margin levels if it felt the amount held by a clearing house was inadequate.
“It is incumbent on market participants to conduct appropriate due diligence to determine whether these products, which have at times exhibited extreme volatility, are appropriate for them,” he noted.